Treasury Department Flooding Market With Bonds

While biggest buyers of US debt shrink their Treasury holdings

As we pointed out in an article last week, the US federal government has added $1.5 trillion to the national debt over the last 12 months.

As a result, the US Treasury Department is flooding the market with bonds. Meanwhile, the biggest buyers of US debt – China, Japan and the Federal Reserve – are shrinking their Treasury holdings. For the past several months, we’ve been saying this is a big problem for the US government that most people are overlooking. And we aren’t the only ones sounding warning bells.

According to TBAC calculations, the Treasury Department will need to sell a staggering $12 trillion in bonds over the next decade. Even without factoring in the possibility of a recession this will “pose a unique challenge for Treasury.”

“In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries?”

We’ve been asking the same question: who in the hell is going to buy all of these bonds?

Consider this: China and Japan rank as the two biggest holders of US debt.

China’s holdings fell by $55 billion from a year earlier to $1.12 trillion.

Japan’s holdings fell by $47 billion from a year earlier to $1.04 trillion. Japan has reduced its investments in US paper by 16% since its peak at the end of 2014 ($1.24 trillion).

That means Americans are going to have to foot their own bill. As the TBAC noted, “Given stagnation in international reserves, there is likely an increased need for this debt to be financed domestically.”

Domestic buyers have been picking up the load so far. American banks, hedge funds, pension funds, mutual funds, and other institutions along with individual investors increased their holdings of US Treasuries by $1.36 trillion between November 2017 and November 2018.

But how long can this keep up?

Here’s a little perspective courtesy of the Financial Times.

“This week, one of America’s biggest hedge funds privately concluded that in five years’ time the Treasury will need to sell bonds equivalent to 25% of gross domestic product, up from 15% now. This level of debt has occurred just twice in the past 120 years, first during the second world war and then again during the 2008 financial crisis. The first time, the US government forced private domestic savers to buy its debt via a patriotic propaganda campaign and financial controls. The second time it relied on its central bank’s balance sheet via quantitative easing.”

“We’ve just created a massive amount of inflation. Quantitative easing is just a euphemism for inflation. That’s what inflation is — expanding the money supply. Printing up money and buying government bonds is the definition of inflation. The Fed has been inflating like crazy.”

Of course, the other possibility is that interest rates will surge as the supply of bonds outstrips demand. As we’ve said over and over again, rising interest rates aren’t good news in a world loaded up on debt.

It’s increasingly looking like the US government has spent itself between a rock and a hard place.

Democratic Gov. Phil Murphy is prepared to sign the bill that will allow the state’s 565 municipalities to literally tax the rain by charging property owners a fee for their parking lots and driveways, or any other surface rainwater can’t penetrate.